Do you smell the budget season approaching? We do! Quite a few Indians are excited and optimistic right before the budget announcements. But when they actually sit to make sense of what the coming year’s budget entails for them, they are often confronted with terms and numbers that they haven’t heard of before. But not to worry, because you know what? There is a first time for everything, for everyone of us. That’s why, here are 5 macro-economic terms that you will definitely come across in some of the key announcements of the union budget.
You will come across this term not only in the budget announcements, but also when looking at news on the markets and economy – and for the right reasons. You must already know that GDP measures something about the economy. To be more precise, Gross Domestic Product or GDP, is a measure of the value of final goods and services that result from the output of economic activity within a given year. GDP growth simply measures the rate at which the value of the GDP is increasing.
So why is this number important? Because, well, if the GDP is shrinking instead of growing, the country is in an economic slowdown – your investments will suffer, people might lose jobs, and what you will see around yourself, is the opposite of prosperity! Moreover, a strong and stable rate of GDP growth is also an expectation that citizens have of those who are in charge of running the economy. But don’t let these thoughts bother you – because India’s GDP growth targets have been set higher for the next year compared to the previous one – and thought leaders also see India as a high-growth economy in the next few years!
Employment (or unemployment) rates
After reading the last section, you must have already decoded the direct link between GDP growth and employment – well, if a lot of people are out of jobs, they are not contributing to economic activity in a country. That’s why, a low unemployment rate is a marker of a flourishing economy – unemployment rate meaning the ratio between the number of employed people and the size of population that falls in the employment age bracket. But what about the indirect links between unemployment and the budget?
It turns out that unemployment rates are highly affected by the government’s education and income related policies in the long run. Moreover, low employment rates increase the competition for jobs, and reduce the bargaining power of employees in the job market. That’s why, the government introduces policies that directly create jobs, or stimulate economic activity, which indirectly creates more jobs. Analysts recommend that India create over 90 million non-farm jobs between 2023 and 2030 – budgetary announcements in this area will therefore indicate India Inc’s stance on this issue in the long run.
Another common term that you will hear in the news. This term isn’t so hard to understand. Ever heard your parents tell you how a kilogram of potatoes used to cost a twentieth of a rupee back in the days? This my friend, is inflation at play – basically, if you keep money in the form of cash, what it can buy for you will keep getting smaller in the long run. Inflation measures the rate of decline in the value of the currency – the rupee.
Expected to be upwards of 5% in the coming year, this is 1% above RBI’s targets. High inflation is bad for the economy since it has a regressive effect on people with low incomes, reduces the real value of your pay, negates the growth of money resulting from most savings accounts, and increases the cost of borrowing – all of this sounds bad. That’s why, keeping inflation at healthy levels is a key imperative of budgetary plans.
You will need some context to understand this. The government has to spend the money it earns through sources like taxes and levies to keep the critical functions of the economy running. Fiscal deficit is basically the difference between the revenues earned by the government, and its expenditures during the financial year.
High fiscal deficit is bad – because the government has to borrow money if it spends a lot more than it earns. This can lead the government into a debt trap – and high levels of debt are bad for the economy. The Government is all set to breach the fiscal deficit target of 3.6% for FY2021-22 with markets expecting fiscal deficit figure to be between 6.5% to 7% for FY2021-22. Moreover fiscal deficit are expected to remain well above the medium targets set by the Government over the next few years as well. As a result, you might see a bunch of public companies being sold through IPOs in the coming year!
Remember when we said that the government needs to borrow money from various sources to meet its expenditures in a given budgetary cycle? Bonds are one example of how this is done. So public debt is basically a measure of how much the government owes to other stakeholders – inside the country and abroad.
While public debt is found to stimulate economic activity in some case studies, excessive public debt can indicate a bad control over the economy. India’s state and center’s combined public debt is expected to rise to 90% of the GDP over the next few years, and may cost India a few points in the S&P500 global ratings.
So these are a few key terms that you will definitely come across in the budget announcements on Feb 1, 2021. We recommend that you pay close attention to the upcoming budget, as it can help you decode some of the best financial choices that you can make for yourself in the coming year. Keep yourself in the loop with Angel One, as we sit to decipher #BudgetKaMatlab – visit https://www.angelone.in/unionbudget-2021 for more information!